Spanish Markets Down as Catalan Political Uncertainty May Drag on

Sylvia

2017-12-25

Spain’s main stock exchange was trading down on Friday after a snap regional election in the northeast of Catalonia left a similar political landscape to the previous poll in 2015 that gave way to a push for independence, potentially causing political uncertainty to drag on.

Madrid’s Ibex 35 blue chip index was trading down 1.19% by 11:15 GMT, moderating initial losses of 1.60%, as Catalan nationalist parties may be able to form a government in the seven million-strong region, which accounts for around 20% of Spain’s GDP, and renew their push for independence.

However, despite a majority of seats in the regional Catalan assembly, the nationalists failed to reach the 50% threshold in popular vote and their total share of the vote actually decreased compared to the previous election.

Thursday’s poll registered an exceptionally high turnout at 82% after the previous nationalist-leaning regional government pushed unilaterally for a referendum on independence on 1 October that had been declared illegal by Spain’s constitutional court.

According to figures from the Catalan government at the time, 43% of voters (2.26m) cast their vote on the 1 October referendum, with 90% of them (2.02m) voting in favour of independence, less than 40% of the 5.5m-strong electorate.

The political drama reached its climax on 10 October, when the Catalan government, based on the results of the referendum, declared independence to immediately “suspend” it.

Since then, more than 1,000 companies have moved their headquarters elsewhere in Spain due to the uncertainty, including Catalonia's biggest banks Caixabank and Banco Sabadell.

Soon after the suspended declaration of independence, the Spanish central government took the historic decision to impose direct rule and called for an immediate election for 21 December.

The nationalist camp gave legitimacy to the poll, which political analysts considered to be a return to the legal framework.

However, the results on Thursday’s election remained stubbornly similar to the previous election in 2015.

The nationalist camp achieved 47.5% of the popular vote, but the electoral system over represents smaller counties which lean nationalist and, as a result, the parties supporting independence won a two-seat majority in the 135-strong regional assembly, at 70 seats.

“It is early days to know what the next Catalan government will look like. The only thing we demand is that the new government respects the legal framework at all times,” the director general of Spain’s chemical trade group FEIQUE, Juan Antonio Labat, said to ICIS on Friday.

Catalonia is home to Tarragona’s chemical park, one of the largest in the country employing 12,000 and where major global chemical players have production facilities.

The three parties in the nationalist block are the centre-right Together for Catalonia (22% of votes, 34 seats), the Republican Left (21% and 32 seats) and the far-right CUP, with 4.5% of the popular vote and four seats.

London-based equity analysts at Germany’s Deutsche Bank said that political uncertainty may drag on as the alliances within the nationalist camp could prove fragile due to the lack of a common political agenda apart from the desire of breaking away from Spain.

“The formation of a government could prove very difficult, in part as the three independentist parties did not join forces during the campaign and would now have to agree on a common leadership and political agenda,” said the analysts.

“Further, another uncertainty is the situation of elected independentists that may not be able to turn up in the regional Parliament because they are in exile or in jail.”

The analysts added that were the political uncertainty to persist, Catalonia may be facing elections yet again in the first half of 2018.

The non-nationalist camp revived on Thursday’s poll as voters who traditionally abstain did cast their vote, according to analysts.

In fact, the centre-right Citizens party, founded in Catalonia only in 2011 as a response to the nationalist push, came first with nearly 25% of the popular vote and 37 seats.

Its victory, however, will not allow it to form a government. Its leader Ines Arrimadas said before her supporters on Thursday night that the result showed Catalonia was not for independence and hoped for a changed political environment in the region. She also called for a change in the electoral system which favours nationalist parties.

Spain’s Prime Minister Mariano Rajoy’s Popular Party (centre-right) became a residual force in Catalonia on Thurday, winning only four seats and 4% of the vote.

In a worrying sign for this party, Citizens’ advances in Catalonia could be further expanded in the rest of the country, as its anti-corruption message is making inroads among the urban, middle-class voters who formerly favoured Rajoy’s party.

In another sign of the decline of Spain’s bipartisan system, the Socialist party only achieved 14% of the vote and 17 seats, far from its own expectations. It did not manage to capitalise on the resurgent anti-nationalist sentiment among working class voters in the region.

The non-nationalist camp is completed with Catalonia’s branch of the left-leaning Podemos ("We Can"), which has been threatening the Socialists with overtaking them as the main voice on the Spanish left.

However, voters disliked its ambiguity regarding the independence referendum, according to analysts. At times, the party sided with the Catalan nationalists and rejected the Constitutional court rulings, hoping to make inroads into the nationalist-leaning young voters.

On Thursday’s poll, it achieved 7.5% of the vote and eight seats, down from 11 seats in the 2015 polls.

While Spain’s recovery remains on track, the Catalan crisis has prompted the central government to lower GDP growth expectations for this year and next, as investors shy away from putting their money in a region where there can be any trace of legal uncertainty.

Whether the nationalist camp – which has consistently achieved 48% of the vote since the mid-1990s – will unilaterally push for independence again remains to be seen, but the resurgence of the Citizens party, which does not even contemplate a legal and agreed referendum on independence, would only add drama to the scene.

While a legal referendum on independence may be still years away, most analysts agree that to overcome the current impasse Spain will need to reform its Constitution to try accommodate Catalan demands within.

Among others, Catalan nationalists claim the industrious, wealthy region contributes too much to the common Spanish budget, and receives little.

The consistent claim of “oppression” to Catalonia from the Spanish authorities is obviously overblown, as the many millions who visit Barcelona every year could bear witness to, but Spain will need to find a compromise to accommodate the more than 2m people who consistently vote for Catalan parties which are willing to break up away from Spain and the EU altogether.

All political analysts have agreed on one thing, however. These elections were a one-theme affair, pointing to the lack of debate on how to improve the economy or the battered public services, which have endured steep spending cuts due to lower tax receipts since 2008 on the back of the economic crisis.

Catalonia, like the rest of Spain, still suffers urgent social problems, a reminder of the scars left by the collapse of the housing bubble which fuelled growth in the 1998-2008 decade.

Unemployment in Catalonia remains at around 13%, while youth unemployment stands at a painful 30%.

Catalan voters, however, may be unaware of those figures: their political leaders failed to debate about them during the electoral campaign.